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Will Population And Portfolio Growth Coincide In Africa?

By 2100, one in three people on Earth will likely be born in sub-Saharan Africa. The consequences of this shift, for African nations and the global community alike, are not yet clear.

In the United States, Europe and East Asia, birth rates have been sliding for years, triggering worries of a demographic time bomb. The global outlier is Africa. Population counts have been ballooning in many African countries. This phenomenon is thrown into sharp relief by the global trend toward declining birth rates. The CIA World Factbook recently projected that Nigeria’s current population of 219 million would reach around 400 million by 2050. Fifty years out from that estimate, Ethiopia’s population is expected to nearly triple and Tanzania’s could quadruple, according to Census Bureau analysis. The Democratic Republic of the Congo’s population is projected to surpass that of the United States if trends remain unchanged. Analysis from the Pew Research Center suggests that five of the world’s 10 most populous countries will be in Africa by 2100.

These figures should, in theory, hearten those worried about the world population. Due in large part to these estimates, the projection for global population change remains positive, if slowing. But some observers worry that growth in these countries could have dire economic consequences.

While population growth could theoretically boost economic output, many of the growing nations have inadequate infrastructure to support more citizens. In a U.N. report from June 2019, Undersecretary-General for Economic and Social Affairs Liu Zhenmin said that population trends were worrying because many of the fastest-growing countries were already poor. Rapid expansion could put pressure on food supplies and make it harder to fight poverty. Some countries will need an economic boost to prepare for a growing labor force.

A given economy or region could experience such a major shift if a true international success story arises there. Could the next Facebook or Google start in an African country? Of course – in theory. But for many countries, the deck is stacked against it.

One major roadblock in many countries is education. About one-third of the children who aren’t in school worldwide are African. Attendance has suffered during the COVID-19 pandemic because of safety concerns and, in some cases, children taking on work to try to help support their families. Estimates from the International Labour Organization and UNICEF found that the number of children in child labor in sub-Saharan Africa grew by 16.6 million between 2016 and 2020. While education efforts have improved in many countries, especially over the past five years or so, many African nations still lag global education levels.

Some factors holding back education in Africa are within governments’ control. Governments could raise the age through which school is compulsory and crack down on violations of international laws banning child labor. Some nations also lack re-entry policies for students who leave school due to pregnancy. Developing such policies could help more young women to complete their education. In countries including Ethiopia and Nigeria, students also face physical danger as armed conflicts either create collateral damage or actively target schools. Governments in these places can and should focus on keeping schools open and safe. The African Union collectively has committed to ensure the right to free, quality and inclusive education for all. But it is up to local and national governments to implement this pledge.

Some problems, however, are a matter of funding rather than policy. Expanding access to textbooks or the internet, building larger or more centrally located schools, and offering improved training for instructors or tutors are all strategies that require money. Some schools still charge students fees that many families find prohibitive. Removing these fees is important for attendance and enrollment, but will mean schools must secure alternative sources of funding. The roadblock to a growing economy may often be a currently tepid one. And, as a 2020 paper from the Center for Global Development suggested, different communities will likely need custom solutions. This means economies of scale between communities may not always be practical.

Nations where educational and economic opportunities don’t keep pace with a growing population will likely face a spike in emigration. In theory, African workers looking for opportunity elsewhere could create a win-win situation. If trends continue, the United States, much of Europe, and eastern Asia will all need to supplement their shrinking native workforces. Immigration is one potential solution. African immigrants could infuse the economy with the labor that falling birth rates made scarce. But it is not clear this match between workers looking for opportunity and economies looking for workers will be easy. Strong political currents in both the U.S. and Europe have embraced anti-immigrant rhetoric. Beyond popular resistance, countries including the United States currently offer only complex and limited paths to legal residency and citizenship. If countries with declining birth rates hope to attract newcomers, they will need to offer a warmer welcome.

Regardless of the future of African emigrants, nations with growing populations face new economic opportunities in the decades ahead. Whether a given country will prove able to capitalize on their growing pool of workers remains to be seen. But investors may want to consider their exposure to Africa in light of these predictions.

First, investors should bear in mind that Africa is not a monolith. Countries in North Africa tend to present a similar profile to Middle Eastern countries in major industry and natural resources. South Africa offers the continent’s largest market by listings. The country’s economy is largely driven by raw materials; South Africa is the largest producer of gold, platinum, and chromium worldwide. Nigeria, the continent’s third-largest market, boasts an economy driven by petroleum exports. In contrast, many other countries in sub-Saharan Africa still limit or bar investment from international investors. Emerging market stocks in general also are more volatile than developed market stocks. Many U.S. investors prefer to get exposure to emerging market economies by investing in multinational companies that do business there, rather than local enterprises.

Some international investors are also wary of bonds from African countries, despite many of them offering high yields relative to other global options. Part of this is due to unfounded bias, certain economic experts suggest. Policymakers and economists, in Africa and elsewhere, have called for a reevaluation of the high risk premiums attached to bonds from many African countries. Others argue that the risk premiums reflect real liquidity concerns. Many African nations lack a secondary bond market. Potential bureaucratic interference and corruption also concern investors in some places.

It is worth noting that Africa boasts a growing startup culture. As Forbes reported earlier this year, entrepreneurs in many African countries have aimed at solving issues ranging from the large amount of organic waste generated by city dwellers to the absence of accessible health care in low-income communities. Across the continent, startup capital grew from $400 million in 2015 to $2 billion in 2019. Venture capital is different from traditional investing. Still, early stage funding might give some of these enterprises the boost necessary to grow into opportunities for traditional investors.

Like other emerging markets, African nations can offer a means of diversification for American investors, since performance in those markets is generally only loosely correlated with U.S. market performance. And boosters argue that they leave more room for growth. The International Monetary Fund forecasted that average annual gross domestic product will grow in emerging markets by 5.5% in 2021-23, compared with 3.5% for advanced economies. Enthusiasts suggest that growing populations, improved infrastructure and increased productivity could give African markets an edge in the decades to come. More cautious analysts warn that these markets’ volatility makes them worth avoiding, even with the potential for future growth.

At Palisades Hudson, we so far have forgone Africa-centered mutual funds in our client portfolios. This is principally because most securities included in funds come from nations or markets without track records of transparency. In the World Bank’s Ease of Doing Business rankings, the highest ranking sub-Saharan nation (apart from the island nation of Mauritius) was Rwanda, at 38th of 190. Kenya and South Africa followed at 56th and 84th, respectively. Of the 179 countries ranked by the Corruption Perceptions Index from Transparency International, South Africa tied for 69th and Nigeria trailed at 149th. These rankings, while not the bottom of the pack, leave room for improvement and suggest some of the reasons international investors should remain wary for now. However, we remain open to adjusting our strategy if the facts change.

If African countries are going to grow, they will need buy-in from international investors. Some estimates have Nigeria set to become the world’s third-most populous nation by 2100. Barring unforeseen changes, Africa seems likely to be a major source of global labor by the end of this century. Whether Africa’s nations will be able to parlay this growth in human capital into economic prosperity remains unknown. But in a world where population is declining most places, we will all benefit from efficient and effective infrastructure to match tomorrow’s workers with tomorrow’s jobs, at home or abroad.

Managing Vice President Paul Jacobs, of our Atlanta office, is among the authors of our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He wrote Chapter 12, "Retirement Plans"; Chapter 15, "Investment Approaches And Philosophy"; and Chapter 19, "A Second Act: Starting A New Venture." He also contributed to the firm’s book The High Achiever’s Guide To Wealth.